The United States government’s fight against global corruption does not justify the violation of due process rights

October 2016 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

October 2016 Issue

The US government has been aggressively developing programmes and proposing regulations that will make it increasingly easy for the Department of Justice (DoJ) to prosecute asset forfeiture and money laundering cases against foreign persons and companies that invest their monies in the US.

The DoJ touts its “unparalleled commitment” to “fighting corruption” to justify increased law enforcement programmes and proposed legislation in this area. On the other hand, prosecutors have been criticised for abusing asset forfeiture laws because they stand to profit directly. Civil forfeiture is subject to greater abuse because it affords defendants fewer protections than criminal proceedings.

Targeting foreign investors and public officials is likely to be lucrative and this will further incentivise the government to bringing more civil forfeiture cases. But the abuses sully the reputation of the US as a place where even foreign defendants will get a fair shake. Asset forfeiture and money laundering cases against high profile foreign persons and public officials will undoubtedly generate great attention internationally and all eyes will be on the US judicial system. While government prosecutors may be preoccupied with ensuring a win at all costs to protect their reputations, it will be up to the defendants to raise with the courts any abuse and due process violations to even the playing field as much as possible in an already one-sided process.

In 2010, the DoJ launched the Kleptocracy Asset Recovery Initiative to further its “global fight against corruption” and to discourage the investment of stolen funds in the US. The initiative is spearheaded by the DoJ’s Asset Forfeiture and Money Laundering Section, whose success, measured by the value of the assets seized, has exploded over the last decade. Annual net deposits in the Assets Forfeiture Fund, a special fund within the Department of the Treasury, that receives the proceeds of forfeitures, increased from nearly $580m in fiscal year 2005 to $4.5bn in fiscal year 2014. The fund will undoubtedly continue to grow in the current climate. Under the current statute, the DoJ’s budget is enhanced by a percentage of these recoveries, a conflict of interest that encourages abuse and has been criticised by some courts.

Earlier this year, the DOJ filed the largest single action ever brought under this initiative, seeking over $1bn in assets linked to a Malaysian sovereign wealth fund that was created by the Malaysian government to promote economic development in Malaysia through global partnerships and foreign direct investments. In this civil asset forfeiture case, the DoJ accuses a group of co-conspirators, including Malaysia’s prime minister, of siphoning over $3.5bn from the fund. The government claims that at least $1bn traceable to the conspiracy was laundered through the US and used to purchase assets here, including partial interest in a five-star Manhattan hotel, luxury real estate in New York and Los Angeles, and artwork by Vincent Van Gogh and Claude Monet. Some of the money was also allegedly diverted to a production company co-owned by the stepson of the prime minster to bankroll the 2013 film The Wolf of Wall Street.

This year the government ramped up its anticorruption efforts with proposed regulations that will further enhance the DoJ’s ability to bring and prosecute asset forfeiture cases against foreigners. The DoJ has submitted to Congress a number of proposals for legislative amendments. One proposal seeks to expand the types of foreign conduct that are actionable. Under current law, the DoJ can bring money laundering cases and seek asset forfeiture for specific acts of foreign corruption. The proposed amendment expands foreign money laundering predicates to include any violation of foreign law that would be a money laundering predicate if committed in the US. Another proposal eases the government’s evidentiary burden by allowing it to obtain, in legally admissible form, bank records located abroad by serving subpoenas on branches of the bank located in the US. Both proposals seek to expand the reach of US law beyond our borders with serious foreign policy and international law implications.

Civil asset forfeiture cases pose unique challenges to defend. When filing the complaint, the government may seek, on an ex parte basis, an order freezing its target’s assets. This order gives the government an edge and cripples a defendant’s ability to put forth a defence. The government accompanies the filing of its complaints with one-sided press releases that publicise the allegations before the defendant can respond. The imposition of an ex parte freeze order alone gives the allegations credence, which causes foreign banks and businesses to halt doing business with the defendant, which is especially devastating.

The government’s application for a freezing order is often based on a verified complaint signed by the investigating federal agent. While the government can prove its case at trial with after-acquired evidence, it must still allege sufficient facts for the court to have a reasonable belief it will meet its burden at trial. But just because a complaint is verified does not mean that the government meets this standard. It is not uncommon for a complaint to be based on nothing more than an informant’s unverified word and unauthenticated or illegally obtained evidence. One way to counter such tactics is to force the government’s investigators to testify under oath about the quality of the investigation and evidence and press the court for an early trial, both atypical defence strategies.

International money laundering cases often involve elaborate tracing of assets through many layers of banks and shell companies in multiple jurisdictions. The government has been asserting increasingly questionable tracing theories to justify its ex parte freeze orders. These dubious theories sweep into the government net innocent people whose lives and businesses are damaged irreparably. Also obtaining corporate and bank records from some jurisdictions can be a lengthy and sometimes impossible task. Under the guise of a criminal investigation, however, the government has conducted one-sided discovery in violation of the Federal Rules of Civil Procedure and defendants’ due process rights.

Subpoenas for civil discovery are issued under Rule 45 of the Federal Rules of Civil Procedure, where the issuing party must give notice to all other parties and disclose the evidence obtained pursuant to that subpoena. While it is improper per se for the government to use grand jury subpoenas to collect evidence for use in civil cases, it does not stop overzealous prosecutors from doing so in difficult civil cases. Where the government cannot proceed by secret grand jury subpoena because of jurisdictional limitations, it can engage in equally improper conduct overseas through the use of criminal Mutual Legal Assistance Treaties between the US and foreign nations. The use of MLAT requests for assistance in criminal matters to gather evidence for a civil case is presumptively improper, as these treaties apply explicitly to criminal matters. Federal prosecutors and investigators may also travel to foreign jurisdictions while representing to foreign law enforcement officials that they are engaged in a criminal investigation to further collect evidence. In reliance on the law enforcement privilege, the government has asserted it can disclose only what it deems helpful to its civil case and withhold exculpatory information.

A foreign defendant may further be prejudiced by the denial of a visa to enter the country. This hinders the defendant’s ability to work with counsel in the US to prepare the case for trial and appear in court. Negotiations should occur early on to determine what the prosecutors will do to remove this barrier. The government can parole foreign defendants into the country. A sympathetic judge may require written assurance from the DOJ that it is not aware of any criminal investigations that may result in the defendant’s arrest once they enter the country under parole.

The government’s interest in fighting foreign corruption must be balanced against the right of foreign defendants to not have their reputations destroyed and property taken without due process. The US courts’ reputation for fairness extends to foreign citizens regardless of how many salacious facts federal prosecutors can fit into a complaint. But the inherent conflict of interest in the forfeiture laws and the growing number of abuses reported about prosecutors can make these cases look more like a DOJ money grab than legitimate public policy protections for the US economy.

Loura Alaverdi is a partner at Baker & Hostetler LLP. She can be contacted on +1 (212) 589 4214 or by email: lalaverdi@bakerlaw.com.